Sell covered calls using your Employee Stock

Most employees of large corporations already purchase shares of the employer stock through a monthly payroll deduction program. Some companies call this the ESPP Employee Stock Purchase Program. A small portion of an employees paycheck is withheld each month and kept in a brokerage account. The company buys shares for the employee usually twice a year. Once the shares are bought they are available in the employees brokerage account and can be sold. This is an excellent program to easily accumulate shares in a company.

Generally the employee is accumulating these shares for the long term but may be willing to sell once the price is attractive and a profit can be made. Once the share price reaches an acceptable selling price, instead of selling the shares, try selling covered calls on those shares you a willing and ready to sell. There is a potential to make a little extra cash before the shares are sold.

Once you determine a selling price (Strike Price) then you can decide on how long you want to wait for the stock to reach that price (Expiration).

Selling covered calls is one way of selling your shares once you decide on a good price so you can enjoy a profit. Use covered calls instead of selling them on the open market. There is a way to make a little extra cash money in the process. If the share price reaches your Strike price within the Expiration, then your shares are sold, you take your profit from the sale of the stock and you get a little extra cash called a Premium. If the price of the shares doesn't reach your Strike price then you keep your shares to sell another covered call on another day and keep the extra cash, the Premium too.

Writing covered calls is called a stock market option or derivative. You are not selling your shares when you sell the covered call, you are selling another buyer the chance to purchase your shares. They are willing to pay you the Premium for the the right to buy your shares if the Strike price is reached within the expiration date. If the price reaches the Strike price then they bought the exclusive rights to purchase your shares at that price. If the price level did not get met then they bought those rights and received nothing. Their loss is your gain.

You decide at what price you are willing to sell your shares. The time frame is also decided by you the seller. Here is an example: "I want to sell my shares in MSFT at $50 dollars and I'll keep this offer open for the next 30 days." The buyer of the covered call is willing to pay you extra cash or Premium for the opportunity to purchase your shares at $50 within the next 30 days. If the share price reaches $50 at the expiration date or even if it goes over $50 you've already agreed to sell at $50, so the buyer purchases the shares at $50 and the Premium price.

With this example, your shares of MSFT reached $60 at the expiration point. You already agreed to sell at $50 so your shares were sold to the buyer at $50 per share. And don't forget about the Premium. That premium was paid into your account at the time when you sold the covered call. He buys the shares at $50 plus the premium and after the expiration date he now owns the shares that are worth $60. That is his gain, not yours. You gain is selling your shares at $50 plus the premium.

You keep the extra cash premium no matter if you sell the shares or if the share price didn't reach the $50 at the expiration date. Yes, if MSFT did not get up to $50, you keep the premium and your shares. You can now sell another covered call.

Covered Call Key Points

Own at least 100 shares. One call equals 100 shares.

Check the CALL price of the stock you own on the OPTIONS CHAIN quote page.

Sign up for selling covered calls with your Brokerage Firm.

Wait for an unexpected spike in the share price.

Decide if this price is good to sell your shares. Will selling the shares at the strike price give you a profit?

Sell one covered call for every 100 shares and collect the premium.

Wait for the expiration date and sell your shares if the price was met or exceeded.

If the price was not met repeat the process again.

What do you need to get started.

You need at least 100 shares in a major company. 100 shares equals to one option. If you already own at least 100 shares of a company then check the share price on your favorite Finance page. If you look at the share price on any Finance web page, can you see the "Options Price or Options Chain" of the shares?

Go to Google or Yahoo Finance and type in the company's ticker symbol and get a quote, There is a link to the Option Price or Chain. We will discuss the Options Price or Chain later, but if your company stock does not show the Options Price or Chain, then you cannot write covered calls on that companies shares. Not all companies can have options.

Contact your brokerage and get permission. Brokerage firms require everyone to fill out a form before you are able to write covered calls. Most brokerage firms have forms online you can fill out before you can trade options. Typing "covered calls" in a search box at your brokerage website will get you to the correct form. Once you filled out the form and received permission, you are ready to write covered calls.

Let's go back to the Options Chain chart on any financial website that lists stock price quotes. This is a very confusing chart at first, but don't be discouraged, we only look at half of it, the CALLS section. One section of this chart is showing the Strike Price of the CALLS and the right side is for PUTS. We will only be dealing with CALLS for now. The current call price is the money you will receive for one call which controls 100 of your shares. If you are writing calls on 200 shares, that will equal two CALLS which will be double the price shown for one.

Next you need make some decisions before writing covered calls on your options. You need to decide what is a reasonable price you are willing to sell your shares. You should also decide how many shares to write covered calls on. If you decide to sell one covered call (100 shares) you will receive the strike price shown on the options chain. If you decide to sell 2 covered calls (200 shares) you will receive double the strike price. Potential these shares could be sold at the price you decided if the share price goes above the strike price within the time frame of the call.

Risks:

What could go wrong after you sell the covered call option. Selling covered calls is the easiest option to start and the least risk on Wall Street. The risks are ALL known before you even start.

Here are a few risks:

The share price skyrockets after you sell the covered call. You've already agreed to sell at the Strike price by selling the covered call option. - You agreed at that price because you were making a profit at that price. Take your profit and don't think about the price difference. Enjoy your profits you earned plus the Premium. You have the option to buy your covered calls back, but the price to buy them back increases with the share price. Chasing the stock price up is an easy way to go broke. After the expiration date expires, your shares will be bought by the person paid you the Premium. His gain is that he bought the exclusive rights to purchase your shares at the strike price agreed by you. It's still a win-win. You made a profit by agreeing to sell your shares at a price which is higher than your purchase price. He made a profit by buying the rights to purchase your shares at a strike price which is now much lower than the current price. Everyone is happy.

The share price drops significantly after you sell the covered call. - You had the same risk of the share price dropping even before you sold the covered call. If you want to remove the risk of the share price dropping then sell the stock now before selling the covered call so there is no chance of it dropping in price. If you sell the covered call then the share price drops, then after the expiration date expires you still have the shares and the premium. Wait until another opportunity arises to sell another covered call.

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Comments 3 comments

Interesting article. What would you say is the key advantage to selling covered calls rather than selling the shares themselves? Are you giving up a small chance of a large upside in exchange for a small but certain premium?

RichFatCat 2 years ago from Texas Author

Great comment. I think Covered Calls are a great way to gain some extra income for shares you are ready to sell.

I'm not a big fan of the "buy and write" technique that makes the Premium from the call your only profit.

I like have a lot of gains built up in the stock before I write my calls.

In other word "covered calls are part of my exit plan".

Every time I sell a stock, I give up the possibility of any future upside potential in the stock.

My plan is to sell covered calls at least twice on a stock I want to sell. If I get anxious to sell I will set the strike price lower. If the stock shoots up and my shares get taken, no problem, I was ready to sell anyway. Walk away with the cash and don't fret on the lost opportunity to maximize your gain. A bird in the hand is better than two in the bush.

Cruncher 2 years ago from UK

Thanks for your answer. Makes sense. Doing this you have to be happy as you are to give up those future gains for more certainty, and that might suit many people.

It probably helps to instill discipline as well, so that you are not tempted to hold on to your stock too long when you could sell it at a good price.